The current media coverage and yesterday’s and today’s market bounces in Japan and Asia suggest that the Fukushima situation is starting to come under much better control. This assessment is mainly based on the fact that finally a power cable has been installed which will help to run cooling systems and real water pumps, and based on the alleged fact that radiation levels have come down over the last couple of days.

We remain cautious

Of course, we hope for the best, but we remain skeptical whether the response will be timely enough.

So far, we have observed the following:

TEPCO management has responded to the crisis in a slow and apparently incompetent way, e.g. it did even initially not inform the government about the true degree of the problems.

Japanese pride and honor and its bureaucracy apparently stood in the way of initially and quickly accepting outside help, something that might have helped to bring the crisis response up to speed. Allegedly, a Russian team with Chernobyl Veterans apparently was refused to enter the country (story not verified).

On television, we have seen two Chinook helicopters and a couple of fire brigade water pump lorries. It is obvious that the dropping of sea water by the choppers had to be an act of desperation, as it was spreading the water around and the water shots could not be targeted due to radiation exposure.

·If one compares the potentially devastating consequences of the problem for the Tokyo metro region with the visible amount of technology so far deployed, one wonders what exactly is going on – is this one of the leading technology nations of the world, theh leader in robotics? In such a situation one would also possibly expect a much larger globally concerted operation, given what is at stake.

Systematic Analysis of Problem Components

Please find a link below that provides a systematic overview of critical components on the Fukushima Reactors. This is especially helpful, as the media is filled with conflicting and/or tainted information and it is often not clear which piece of information dates from when. This link from JAIF (Japan Atomic Industrial Forum) gives an excellent analytical overview of the various problems, let us just hope it is based on honest information and not TEPCO spin any more. It is most useful as it is also date-stamped, so one at least knows from which time the different assessments are:

To us, this table looks like we are a long way from a sustainable solution of this crisis, and there are two spent fuel rod pools that are in a “severe” condition. If it is true what US experts suspect (that the spent fuel rod pools are leaking), it might be very difficult to cool the fuel rods down substantially.

The Worst Case Risk

Apparently, the highest risk problem are the “spent fuel pools”.

There, old fuel rods are being stored, usually submerged in water.

Some of these pools have lost their water. This might result in an increased exchange of radiation between the fuel rods which in turn could result in extreme heating up and then a fire or explosion, which in turn would irradiate the entire complex even more. This would make any further recovery work in the complex very difficult or even impossible, and might in turn lead to further loss of control and dramatic problems to avoid a catastrophy.

The Tokyo metropolitan area is only around 200km away, and holds around 35 million people.

Here is a map with Japan’s population density:

The Tokyo Metro Area encompasses more than 35 million people and will be very hard to evacuate. It is also clear that a big part of the countries' industries are located there.

Of course, we hope that the Japanese authorities will be able to get the problem under control over the next couple of days, as the consequences of failing to do so could be catastrophic. Our compassion goes out to the Japanese people and all who are suffering from those horrible and combined catastrophies.

But what does it all mean?

After the market sell-offs over the last couple of days, global stock markets have become strongly oversold and “had” to bounce at least temporarily. What started as a correction (which we actually had already forecasted in our Annual Outlook for February/March) turned into a real crash in certain markets.

It is well possible that technical buyers and bargain hunters will continue to push prices back up a bit more on any slightly positive news, but we remain very cautious, at least for the next couple of days or 1-2 weeks, until it becomes clearer if the catastrophy can be truly contained and not only “medially”.

If this reactor crisis cannot be contained sustainably soon, the fate of the Japanese people and its most important metropolitan region, and therefore its economy would truly depend on the direction of the winds.

The last solution which is now being discussed would be to bury the whole installation in sand and concrete, but I would suspect such a solution brings with it some major operational difficulties, and it currently doesn't seem like this option is being prepared.

Usually, to profit in the markets, one has to buy when everyone else is fearful. As this time around, we are dealing with forces that are very hard to control and which could still escalate any day. Therefore, I doubt this is the time to be overly courageous and/or greedy right now, so caution is advised. The ripple effects could be substantial.

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Who is...

I'm a former Family Office Investment Manager with a strong focus on risk management. My investment approach is based on a combination of Global Macro and proprietary Behavioral Finance techniques.
Asset Allocation is not about twisting 5% between 40% stocks and 60% bonds, but about having a view and identifying future tail risks.